Half of that, or $29 trillion, was created in the extreme bubble just between 2000 and 2008.

Oh, and that doesn’t count the estimated $66 trillion in unfunded entitlements for Medicare, Medicaid and Social Security that will impact our economy and government budgets progressively over the next four decades as the massive Baby Boom retires.

If you take a simple 30,000 foot view, it is impossible for the U.S. and other developed countries to move forward and grow again with total debt ratios (including unfunded entitlements) that total up to between seven and nine times GDP.

The reality is we are going to have to restructure our massive private debts first, and then over time restructure our government deficits and entitlements.

And yes, that means austerity and pain.

If we don’t go through this process in the coming decade, then we, like Japan, will never really grow again… especially not with our demographic trends that move down for the next decade and up only modestly for decades after that.

How to Solve This Dilemma

First, the government should be proactive in helping restructure the $42 trillion in private debt in the U.S. Instead of injecting trillions into the banking system for free, and suspending “mark to market” rules for loans, the government should only grant assistance to banks in direct proportion to the loans they write down for consumers and businesses.

We should be able to write down about $22 trillion to get us back to pre-bubble levels. For every $1 that banks write down, the Fed could grant say 25 cents to help cover their losses so that the banking system does not just totally collapse as it did in the Great Depression.

Under this plan, writing off $22 trillion in private debt would cost the Fed $5.5 trillion. That is much less than the amount of monetary injections of $10 trillion that the Fed is on track to give if it continues its present policies into 2022… before the economy starts to grow long-term again.

The difference is we would lose $22 trillion in private debt and take off the backs of consumers and businesses about $1.5 trillion a year in principal and interest payments.

Now that is a stimulus program!

That would add about 10% a year in new cash flow for spending and savings to our economy to help restore balance again and allow growth, even in the period of demographic decline from 2008 to 2022.

The next step would be to institute longer-term policies to increasingly cut government expenditures over the coming decade and to raise taxes selectively. You simply have to do both to balance the budget long-term. And every area of spending needs to be under intense scrutiny, especially entitlements and defense. Why should WE continue to defend countries from Germany to Japan to South Korea?

The final and most massive step will only be possible after we see a major financial crisis because that’s when citizens, politicians and economists will finally realize that we are bankrupt… that there is simply no way to keep our promised entitlements long-term.

The stark and simple reality that almost no one really gets is this: we have been promised more and more entitlements since the late 1930s while our life expectancies have advanced massively. In the U.S., the person who retires on average at age 63 will now live to be 84. How can we work 43 years on average (from 20 to 63) and then retire for 21 years with a partial salary and ever-growing health care benefits?

The answer is this is not even remotely possible, especially with a smaller working generation ahead to stomach these burdens.

We need a big wake-up call here!

The biggest solution to our massive entitlements dilemma is therefore equally stark and simple. If we simply adjust our retirement age for life expectancy we would be retiring at age 73. That alone would increase revenues by adding 10 more years of contributions AND cut entitlement expenditures roughly in half, simply by subtracting 10 years of retirement.

Then there could be adjustments for “means testing” that gives more benefits to lower income households and less to higher income households.

These solutions to fix our economy are not complex. But they are painful.

We have to all remember that retirement is a fantasy. Just decades ago we did not have retirement to any significant degree.

We got promised more than could be delivered and now we should behave like grown-ups, accept this and be thankful to get 10 years or more of paid retirement… something previous generations didn’t get at all.

As Harry talks about the U.S. government’s massive debt problem, it’s almost funny how unfunded entitlement programs are nearly an afterthought. “Oh yea, and we’re behind the 8-ball on those, too.” It’s just ludicrous.

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.

About Us

Economy & Markets Daily is the first e-letter of its kind that uses the power of demographic trends and purchasing power to accurately identify economic and market boom and busts.

We believe that knowing what consumers are going to buy next (purchasing power)... or what they'll stop buying soon... is the best way to protect your investment portfolio, maximize your returns, and make smart business and financial decisions.

Each week day, Harry Dent, Rodney Johnson, and Adam O'Dell share with you their views on demographic trends, their market research, their economic research, the housing market, economic cycles, market cycles, business cycles, and the looming economic collapse and market crash.